Managing Supply Chain Risks: Strategies & Best Practices

Supply chain disruptions can come from a variety of places: tariffs, economic downturns, shifts in the market, counterfeiting, supplier shutdowns, cyberattacks, and more. Effective Supply Chain Risk Management (SCRM) includes a set of strategies that mitigate external risks at every stage of the global supply chain — from ordering materials to managing customer returns.

Like any business initiative, these strategies to increase supply chain resilience must be weighed against cost and profitability. So, how do you determine where to focus your risk mitigation strategies? And what steps can you take to minimize supply chain disruptions?

The SCOR Model

One of the most widely used tools for evaluating supply chain vulnerabilities is the Association for Supply Chain Management’s Supply Chain Operations Reference (SCOR). This model is used by companies around the world, including Fortune 500 companies such as Intel and Procter & Gamble.

SCOR’s Digital Capabilities Model (DCM) breaks down the supply chain into 250 metrics across seven key processes.

• Orchestrate: High-level strategic planning. Covering human resources, support systems, analytics, contracts, regulation compliance, and risk mitigation.
• Plan: Creating a comprehensive road map for the supply chain.
• Order: Handling customer purchases, from pricing to fulfillment and payment methods.
• Source: Procuring, ordering, accepting, and transferring goods and services.
• Transform: Turning raw materials into finished products.
• Fulfill: All customer delivery activities: packing, shipping, installing, and invoicing.
• Return: Managing reverse logistics, including returns, repairs, and troubleshooting.

SCOR treats these processes as an interconnected loop. For example, improving one area (like transform or source) provides better products, ultimately decreasing returns. However, adjustments in one category often require adjustments in other parts of the process.

Risk Identification Throughout the Entire Supply Chain

A proper supply chain risk management plan goes beyond just warehousing and shipping; it aims to reduce disruptions in the entire product journey from sourcing raw materials to final delivery.

Supplier risks fall into four main categories: environmental risks, political risks, cybersecurity, and economic risks.

Types of Potential Risks

Environmental Risks

Environmental risks stem from both natural disasters and long-term climate shifts that can severely disrupt business continuity and the global supply chain. Acute events such as hurricanes, earthquakes, wildfires, and floods can damage infrastructure, halt production, cause bottlenecks, or delay transportation routes.

On a broader scale, chronic climate conditions, such as droughts or changing rainfall patterns, can affect the availability of raw materials, particularly in agriculture and manufacturing. Companies must build resilience into their supply chains by identifying climate-prone regions and creating contingency plans to ensure continuity.

Political Risks

Political risks include a range of government-related actions or instability that can negatively impact the flow of goods. These may include new tariffs, sanctions, export/import restrictions, trade wars, or labor strikes. A sudden change in a country’s leadership or a shift in international relations can lead to policy changes that affect customs processes, increase costs, or completely sever supplier relationships. Companies sourcing globally must monitor geopolitical developments and diversify supplier locations to reduce overcompensation on politically volatile regions.

Cybersecurity Threats

As supply chains become increasingly digital, they become more vulnerable to cyberattacks. Technology risks and cybersecurity threats include cyberattacks such as ransomware, data breaches, and malware infiltrations — targeting both internal systems and third-party vendors. Cloud-based software and integrated platforms streamline operations but create an increased risk exposure to potential problems.

A single breach can lead to operational paralysis, data loss, or regulatory penalties. To mitigate these risks, businesses must adopt robust cybersecurity measures, conduct regular audits, and ensure partners need shared security standards and risk assessments.

 

 

Economic

Economic risks are tied to market fluctuations, global recessions, and supplier financial health. A downturn in the economy can reduce consumer demand, leading to overstock and revenue decline. Conversely, inflation can raise production and transportation costs, squeezing margins. Suppliers under financial strain may change production lines, compromise quality, or shut down entirely. Monitoring economic indicators and conducting supplier credit assessments can help businesses anticipate and buffer against financial disruptions in the supply chain.

 3 Steps to Mitigating Risks

1. Map Your Supply Chain

To start an evaluation, list all your suppliers, noting what they supply and their geographic locations. Most supply chain software includes this functionality, or you can use a spreadsheet.

2. Rank Risk Factors

Establish categories that are likely to affect sourcing and procurement, and rank each company in each category. How likely is it that a supplier will face a natural disaster or political issue? How stable are they financially? Do you have readily available secondary sources, or are you dependent on one vendor?

3. Calculate Value at Risk (VaR)

In the SCOR model, VaR is a way to assign a dollar value to each risk. If there is a 10% risk of a disruption, it should be calculated as 10% of the value of that service. Establishing the financial value of risks gives you a way to prioritize available resources for risk reduction.

Inventory Management and Forecasting

Just-in-time (JIT) inventory management was all the rage a few years ago, as it minimizes holding costs by reducing inventory as much as possible. A JIT-focused strategy requires tight timetables for the movement of goods to each stage of the supply chain. Massive disruptions caused by the COVID-19 pandemic forced companies to reevaluate this strategy; it frequently resulted in shutdowns due to a lack of supplies across supply chain stages.

Today, the focus is on balancing just-in-time (JIT) against just-in-case (JIC) inventory strategies. JIC uses metrics to establish a minimum inventory level, keeping the supply chain stable during delivery fluctuations. Together, these strategies minimize holding costs while preventing shortages that cut into production and leave customers without products.

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Formulas to Calculate Stock and Order Requirements

Economic Order Quantity (EOQ)

(2 x Cost Per Order x Annual Demand) / Annual Holding Costs

Optimizes order size by balancing ordering and holding costs.

Reorder Point (ROP)

(Daily Demand x Lead Time) + Number of Safety Stock Units

Determines the ideal time to reorder.

Safety Stock

(Maximum Daily Demand x Maximum Lead Time) – (Average Daily Demand x Average Lead Time)

Keeps enough stock on hand to handle stock fluctuations, while minimizing holding costs.

Vendor Reliability

Reliability is paramount to keeping your inventory levels steady. While a vendor may have the staff and equipment to deliver a quality product on time, financial instability can lead to delays. Worse, if the company goes bankrupt, you could be without a critical component for months while you sort out a new supplier.

To protect the supply chain, companies turn to second sourcing. This establishes multiple sources for a product. For complex components, the primary supplier licenses the design to other suppliers. That way, if the primary supplier experiences disruptions, a secondary supplier can deliver an identical product. For commodity products, a second sourcing plan centers on establishing relationships with multiple suppliers that can deliver functionally identical products.

To mitigate political and environmental risks, companies often turn to near-sourcing. This strategy focuses on using suppliers that are close to the buyer’s facilities. Buying products inside the country or nearby ally countries alleviates political issues. Reducing distances between suppliers and facilities cuts down on the potential impact of weather. Often, increases in purchase costs from local suppliers are offset by lower shipping costs.

Cybersecurity & Partnering to Protect Your IT Infrastructure

The days of keeping information in a physical file or a local server are long gone. Outside hosting and cloud computing keep information in physically secure locations and allow access across company locations. While this makes supply chains easier to manage, it also exposes data to cyberattacks. Cyber supply chain risk management strategies (C-SCRM) focus on reducing the impact of cyber threats. While companies often hand off systems management to outside companies, providers and clients need to work together to create a C-SCRM strategy. This type of risk management can be divided into four stages.

The 4 Stages of C-SCRM

1. Prospecting

Vendors and suppliers are vetted, ensuring their security postures are in line with the company’s risk management standards. This includes their security architecture, governance, incident response strategy, and employee training.

2. Acquisition

The risks of onboarding a new supply chain partner are evaluated, including potential disruptions and threats like malware and ransomware.

3. Risk Management

Once partners are onboarded, they are periodically assessed to ensure cybersecurity risks are within the company’s tolerance levels. This includes both cyber threats and information leaks.

4. Continuous Monitoring

As threats evolve, countermeasures must be put in place to thwart them in real-time. Meanwhile, current countermeasures are tested periodically to ensure they are effective. This includes everything from simulating a DdoS attack, which overloads servers with requests, to social engineering exercises, which try to get unsuspecting employees to leak information.

The Role of Labeling in Supply Chain Management

Labels play a critical role in asset tracking and supply chain visibility. One item can get several labels over its lifecycle from sourcing to transformation, warehousing, shipping, and retail.

This starts with receiving goods from suppliers. Once the supplier’s label is checked, the contents of each shipment are broken down for transformation. At this point, each item needs to be identified in your logistics system. It’s common for labels to include both machine and human-readable information. That way, damage to the label won’t prevent the item from being identified.

Bar codes and RFID tags are used for logistics tracking. Scanning a container through each part of the logistics chain ensures its location is always known. This also aids in managing inventory turnover and gathering analytics to manage warehouse and business operations.

Third-party logistics companies have their own identification systems, like the tracking numbers used by shipping companies. Sellers also have their own identification requirements for packaging, including UPC codes for physical retailers and FNSKU for products sold on Amazon.

Labels also need to meet government regulations, including required warnings, statements, and branding. This gets especially complex when you’re shipping products to multiple countries. Recalls are expensive, often costing several dollars per label to process returns, not to mention potential government fines. While you can make labels for each location, it might be easier to use cover labels. These labels obscure or replace information that doesn’t meet a location’s regulatory requirements. Machines like our 360a Model Y Applicator have this functionality built-in, making it easy to prep containers for international shipment.

The labels themselves can cause supply issues due to shortages. Fortunately, pressure-sensitive labeling can be tailored to any use, thanks to the range of adhesives, face stock, ink, and coatings available. That means it’s easy to find alternative materials to sidestep shortages from a single supplier and long lead times for your standard labels.

Counterfeiting: More Than a Consumer Problem

For consumers, there are several indicators to suggest an item is counterfeit, including unusually low prices and questionable sales channels. Unfortunately, business-to-business counterfeiting is harder to spot. Companies can create the appearance of legitimacy by offering logistical support and accurate pricing while delivering inferior goods. Pharmaceuticals are particularly prone to this type of counterfeiting since it’s hard to verify the content and purity of medicines. Other common targets of counterfeiters are spare parts and metal components.

In 2019, it’s estimated that counterfeit goods accounted for 3.3% of global trade. Researchers at the Cranfield School of Management found these three primary strategies are the most effective at combating counterfeit supplies:

Counterfeit Response Plans

• High-Level Specifications: Difficult to replicate, making counterfeits easier to detect.
• Post-Contract Incentives: Encourage quality through metrics and performance-based bonuses.
• Supplier Relationship Management (SRM): Maintain close ties with critical suppliers for transparency.

Packaging also plays an important role in verifying genuine products. Various methods have been used to identify genuine goods, including watermarks, holograms, and other labeling technologies. Unfortunately, it doesn’t take long for counterfeiters to duplicate these features. The latest tool in this labeling arms race is blockchain technology.

A blockchain is a type of ledger that creates a unique ID for each new entry dependent on the previous entry. This makes it difficult to predict a valid ID, preventing counterfeiters from creating fake credentials. This ledger can be linked to a QR code or other ID on the product label, letting consumers check the authenticity of a product against the seller’s own database. While early use was focused on luxury goods, several major retail and B2B retailers, including Amazon and Alibaba, now offer Blockchain as a Service (BaaS) to help sellers authenticate their products.

Get the Equipment You Need to Label Your Inventory

If you need accurate labeling to track assets in your supply chain, contact CTM Labeling Systems. We build a wide range of automated labeling machines that can be tailored to almost any use case. Our local distributors will help you find a solution for your unique labeling needs, no matter the product.